1. Operations Management
Chapter 11 –
Supply Chain Management

2. Outline Global Company Profile: Darden Restaurants
The Supply Chain’s Strategic Importance
Global Supply Chain Issues
Supply Chain Economics
Make-or-Buy Decisions
Outsourcing

3. Outline – Continued Ethics in the Supply Chain Supply Chain Strategies
Many Suppliers
Few Suppliers
Vertical Integration
Keiretsu Networks
Virtual Companies

4. Outline – Continued Managing the Supply Chain E-Procurement
Issues in an Integrated Supply Chain
Opportunities in an Integrated Supply Chain
E-Procurement
Online Catalogs
Auctions
RFQs
Realtime Inventory Tracking

5. Outline – Continued Vendor Selection Vendor Evaluation
Vendor Development
Negotiations

6. Outline – Continued Logistics Management
Distribution Systems
Third-Party Logistics
Cost of Shipping Alternatives
Logistics, Security, and JIT
Measuring Supply Chain Performance

7. Learning Objectives
When you complete this chapter you should be able to:
Explain the strategic importance of the supply chain
Identify five supply chain strategies
Explain issues and opportunities in the supply chain
Describe approaches to supply chain negotiations

8. Learning Objectives
When you complete this chapter you should be able to:
Evaluate supply chain performance
Compute percent of assets committed to inventory
Compute inventory turnover

9. Darden Restaurants
Largest publicly traded casual dining company in the world
Serves over 300 million meals annually in more than 1,400 restaurants in the US and Canada
Annual sales of $2.4 billion
Operations is the strategy

10. Darden Restaurants
Sources food from five continents and thousands of suppliers
Four distinct supply chains
Over $1.5 billion spent annually in supply chains
Competitive advantage achieved through superior supply chain

11. The Supply Chain’s Strategic Importance
Supply chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers
Competition is no longer between companies; it is between supply chains

12. Supply Chain Management
Important activities include determining
Transportation vendors
Credit and cash transfers
Suppliers
Distributors
Accounts payable and receivable
Warehousing and inventory
Order fulfillment
Sharing customer, forecasting, and production information

13. A Supply Chain for Beer
Figure 11.1

14. Global Supply Chain Issues
Supply chains in a global environment must be able to
React to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates
Use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out
Staff with local specialists who handle duties, freight, customs and political issues

15. How Supply Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Supplier’s goal
Supply demand at lowest possible cost (e.g., Emerson Electric, Taco Bell)
Respond quickly to changing requirements and demand to minimize stockouts (e.g., Dell Computers)
Share market research; jointly develop products and options (e.g., Benetton)
Primary selection criteria
Select primarily for cost
Select primarily for capacity, speed, and flexibility
Select primarily for product development skills
Table 11.1

16. How Supply Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Process charact-eristics
Maintain high average utilization
Invest in excess capacity and flexible processes
Modular processes that lend themselves to mass customization
Inventory charact-eristics
Minimize inventory throughout the chain to hold down cost
Develop responsive system with buffer stocks positioned to ensure supply
Minimize inventory in the chain to avoid obsolescence
Table 11.1

17. How Supply Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Lead-time charact-eristics
Shorten lead time as long as it does not increase costs
Invest aggressively to reduce production lead time
Invest aggressively to reduce development lead time
Product-design charact-eristics
Maximize performance and minimize costs
Use product designs that lead to low setup time and rapid production ramp-up
Use modular design to postpone product differentiation as long as possible
Table 11.1

18. Supply Chain Economics
Supply Chain Costs as a Percent of Sales
Industry
% Purchased
All industry 52
Automobile 67
Food 60
Lumber 61
Paper 55
Petroleum 79
Transportation 62
Table 11.2

19. Supply Chain Economics
Dollars of additional sales needed to equal $1 saved through the supply chain
Percent of Sales Spent in the Supply Chain
Percent Net Profit
of Firm 30% 40% 50% 60% 70% 80% 90%
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67
4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29
6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50
8 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11
10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.00
Table 11.3

20. Make-or-Buy Decisions
Maintain core competence
Lower production cost
Unsuitable suppliers
Assure adequate supply (quantity or delivery)
Utilize surplus labor or facilities
Obtain desired quality
Remove supplier collusion
Obtain unique item that would entail a prohibitive commitment for a supplier
Protect personnel from a layoff
Protect proprietary design or quality
Increase or maintain size of company
Reasons for Making
Table 11.4

21. Make-or-Buy Decisions
Frees management to deal with its core competence
Lower acquisition cost
Preserve supplier commitment
Obtain technical or management ability
Inadequate capacity
Reduce inventory costs
Ensure alternative sources
Inadequate managerial or technical resources
Reciprocity
Item is protected by a patent or trade secret
Reasons for Buying
Table 11.4

22. Outsourcing
Transfers traditional internal activities and resources of a firm to outside vendors
Utilizes the efficiency that comes with specialization
Firms outsource information technology, accounting, legal, logistics, and production

23. Ethics in the Supply Chain
Opportunities for unethical behavior are enormous and temptations are high
Many companies have strict rules and codes of conduct that define acceptable behavior
Institute for Supply Management has developed a detailed set of principles and standards for ethical behavior

24. Principles and Standards for Ethical Supply Management Conduct
LOYALTY TO YOUR ORGANIZATION
JUSTICE TO THOSE WITH WHOM YOU DEAL
FAITH IN YOUR PROFESSION
Table 11.5

25. Principles and Standards for Ethical Supply Management Conduct
Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and communications
Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using reasonable care and granted authority
Avoid any personal business or professional activity that would create a conflict between personal interests and the interests of the employer
Table 11.5

26. Principles and Standards for Ethical Supply Management Conduct
Avoid soliciting or accepting money, loans, credits, or preferential discounts, and the acceptance of gifts, entertainment, favors, or services from present or potential suppliers that might influence, or appear to influence, supply management decisions
Handle confidential or proprietary information with due care and proper consideration of ethical and legal ramifications and government regulations
Promote positive supplier relationships through courtesy and impartiality
Avoid improper reciprocal agreements
Table 11.5

27. Principles and Standards for Ethical Supply Management Conduct
Know and obey the letter and spirit of laws applicable to supply management
Encourage support for small, disadvantaged, and minority-owned businesses
Acquire and maintain professional competence
Conduct supply management activities in accordance with national and international laws, customs, and practices, your organization’s policies, and these ethical principles and standards of conduct
Enhance the stature of the supply management profession
Table 11.5

28. Supply Chain Strategies
Negotiating with many suppliers
Long-term partnering with few suppliers
Vertical integration
Keiretsu
Virtual companies that use suppliers on an as needed basis

29. Many Suppliers Commonly used for commodity products
Purchasing is typically based on price
Suppliers compete with one another
Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery

30. Few Suppliers
Buyer forms longer term relationships with fewer suppliers
Create value through economies of scale and learning curve improvements
Suppliers more willing to participate in JIT programs and contribute design and technological expertise
Cost of changing suppliers is huge

31. Computers Watches Calculators
Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material (suppliers)
Iron ore
Silicon
Farming
Backward integration
Steel
Current transformation
Automobiles
Integrated circuits
Flour milling
Forward integration
Distribution systems
Circuit boards
Finished goods (customers)
Dealers
Computers Watches Calculators
Baked goods
Figure 11.2

32. Vertical Integration
Developing the ability to produce goods or service previously purchased
Integration may be forward, towards the customer, or backward, towards suppliers
Can improve cost, quality, and inventory but requires capital, managerial skills, and demand
Risky in industries with rapid technological change

33. Keiretsu Networks
A middle ground between few suppliers and vertical integration
Supplier becomes part of the company coalition
Often provide financial support for suppliers through ownership or loans
Members expect long-term relationships and provide technical expertise and stable deliveries
May extend through several levels of the supply chain

34. Virtual Companies
Rely on a variety of supplier relationships to provide services on demand
Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demands
Exceptionally lean performance, low capital investment, flexibility, and speed

35. Managing the Supply Chain
There are significant management issues in controlling a supply chain involving many independent organizations
Mutual agreement on goals
Trust
Compatible organizational cultures

36. Issues in an Integrated Supply Chain
Local optimization - focusing on local profit or cost minimization based on limited knowledge
Incentives (sales incentives, quantity discounts, quotas, and promotions) - push merchandise prior to sale
Large lots - low unit cost but do not reflect sales
Bullwhip effect - stable demand becomes lumpy orders through the supply chain

37. Opportunities in an Integrated Supply Chain
Accurate “pull” data
Lot size reduction
Single stage control of replenishment
Vendor managed inventory
Blanket orders

38. Opportunities in an Integrated Supply Chain
Standardization
Postponement
Drop shipping and special packaging
Pass-through facility
Channel assembly

39. Radio Frequency Tags Radio Frequency Tags: Keeping the Shelves Stocked
Supply chains work smoothly when sales are steady, but often break down when confronted by a sudden surge in demand. Radio frequency ID (or RFID) tags can change that by providing real-time information about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers.

40. E-Procurement Uses the internet to facilitate purchasing
Electronic ordering and funds transfer
Electronic data interchange (EDI)
Advanced shipping notice

41. E-Procurement Online catalogs Catalogs provided by vendors
Catalogs published by intermediaries
Exchanges provided by buyers

42. Internet Trading Exchanges
Health care products – ghx.com
Retail goods – gnx.com
Defense and aerospace products – exostar.com
Food, beverage, consumer products – transora.com
Steel and metal products – metalsite.com
Hotels – avendra.com

43. E-Procurement Auctions
Maintained by buyers, sellers, or intermediaries
Low barriers to entry
Increase in the potential number of buyers

44. E-Procurement RFQs Real-time inventory tracking
Can make requests for quotes (RFQs) less costly
Improves supplier selection
Real-time inventory tracking

45. Vendor Selection Vendor evaluation Vendor Development
Critical decision
Find potential vendors
Determine the likelihood of them becoming good suppliers
Vendor Development
Training
Engineering and production help
Establish policies and procedures

46. Vendor Selection Negotiations
Cost-Based Price Model - supplier opens books to purchaser
Market-Based Price Model - price based on published, auction, or indexed price
Competitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult

47. Vendor Evaluation Criteria Weights Scores (1-5) Weight x Score
Engineering/research/innovation skills
.20 5
1.0
Production process capability (flexibility/technical assistance)
.15 4 .6
Distribution/delivery capability
.05 .2
Quality systems and performance
.10 2
Facilities/location .1
Financial and managerial strength (stability and cost structure)
Information systems capability (e-procurement, ERP)
Integrity (environmental compliance/ ethics)
Total
1.00
3.9

48. Logistics Management
Objective is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities
Is a frequent candidate for outsourcing
Allows competitive advantage to be gained through reduced costs and improved customer service

49. Distribution Systems Trucking Railroads
Moves the vast majority of manufactured goods
Chief advantage is flexibility
Railroads
Capable of carrying large loads
Little flexibility though containers and piggybacking have helped with this

50. Distribution Systems Airfreight Fast and flexible for light loads
May be expensive

51. Distribution Systems Waterways
Typically used for bulky, low-value cargo
Used when shipping cost is more important than speed

52. Distribution Systems Pipelines
Used for transporting oil, gas, and other chemical products

53. Third-Party Logistics
Outsourcing logistics can reduce costs and improve delivery reliability and speed
Coordinate supplier inventory with delivery services
May provide warehousing, assembly, testing, shipping, customs

54. Cost of Shipping Alternatives
Product in transit is a form of inventory and has a carrying cost
Faster shipping is generally more expensive than slower shipping
We can evaluate the two costs to better understand the trade-off

55. Cost of Shipping Alternatives
Value of connectors = $1,750.00
Holding cost = 40% per year
Second carrier is 1 day faster and $20 more expensive
Daily cost of holding product
= x /365
Annual holding cost
Product value
= (.40 x $1,750)/ 365 = $1.92
Since it costs less to hold the product one day longer than it does for the faster shipping ($1.92 < $20), we should use the cheaper, slower shipper

56. Logistics, Security, and JIT
Borders are becoming more open in the U.S. and around the world
Monitoring and controlling stock moving through supply chains is more important than ever
New technologies are being developed to allow close monitoring of location, storage conditions, and movement

57. Measuring Supply Chain Performance
Typical Firms
Benchmark Firms
Lead time (weeks) 15 8
Time spent placing an order
42 minutes
15 minutes
Percentage of late deliveries
33% 2%
Percentage of rejected material
1.5%
.0001%
Number of shortages per year
400 4
Table 11.6

58. Measuring Supply Chain Performance
Assets committed to inventory
Percent invested in inventory
= x 100
Total inventory investment
Total assets
Investment in inventory = $11.4 billion
Total assets = $44.4 billion
Percent invested in inventory = (11.4/44.4) x 100 = 25.7%

59. Measuring Supply Chain Performance
Inventory as a % of Total Assets (with exceptional performance)
Manufacturing 20% (Toyota 5%)
Wholesale 34% (Coca-Cola 2.9%)
Restaurants 2.9% (McDonald’s .05%)
Retail 27% (Home Depot 25.7%)
Table 11.7

60. Measuring Supply Chain Performance
Inventory turnover
Inventory turnover =
Cost of goods sold
Inventory investment

61. Measuring Supply Chain Performance
Examples of Annual Inventory Turnover
Food, Beverage, Retail Manufacturing
Anheuser Busch 15 Dell Computer 90
Coca-Cola 14 Johnson Controls 22
Home Depot 5 Toyota (overall) 13
McDonald’s 112 Nissan (assembly) 150
Table 11.8

62. Measuring Supply Chain Performance
Inventory turnover
Net revenue $32.5
Cost of goods sold $14.2
Inventory:
Raw material inventory $.74
Work-in-process inventory $.11
Finished goods inventory $.84
Total inventory investment $1.69

63. Measuring Supply Chain Performance
Inventory turnover
Net revenue $32.5
Cost of goods sold $14.2
Inventory:
Raw material inventory $.74
Work-in-process inventory $.11
Finished goods inventory $.84
Total inventory investment $1.69
Inventory turnover =
Cost of goods sold
Inventory investment
= 14.2 / 1.69 = 8.4

64. Measuring Supply Chain Performance
Inventory turnover
Net revenue $32.5
Cost of goods sold $14.2
Inventory:
Raw material inventory $.74
Work-in-process inventory $.11
Finished goods inventory $.84
Total inventory investment $1.69
Inventory turnover =
Cost of goods sold
Inventory investment
= 14.2 / 1.69 = 8.4
Average weekly cost of goods sold
= $14.2 / 52 = $.273
Weeks of supply =
Inventory investment
Average weekly cost of goods sold
= 1.69 / .273 = 6.19 weeks